April Dividend Champion Portfolio

In December 2010, I created a screen/hypothetical portfolio called the “High Yield Dividend Champion Portfolio.” The screen is tracked publicly as a continuous hypothetical portfolio with a starting balance of $100,000 on Scott’s Investments.

Like many of the screens, strategies, and portfolios I track and prefer, the High Yield Dividend Champion Portfolio uses a small number of historically relevant ideas to create a simple, yet powerful investment plan. As I previously detailed, “Some studies have shown that the, highest yielding, low payout stocks perform better over time than stocks with higher payouts and lower yields.”

The High Yield Dividend Champion Portfolio attempts to capture the best high yield, low payout stocks with a history of raising dividends. There are numerous ways to rank high yield/low payout stocks. The screening process for this portfolio starts with the “Dividend Champions” as compiled by DRIP Investing. The list is comprised of stocks that have increased their dividend payout for at least 25 consecutive years.

In January I announced some changes to the ranking system. The changes were not due to poor performance – the strategy has returned over 55% since late 2010:

We still begin with the Dividend Champion list. The list is first sorted by yield and the lowest 50% yielding stocks are eliminated. Eliminating the lowest yielding stocks ensures only stocks with a “high” yield make the portfolio.

The remaining stocks are then assigned a rank based on their yield (the higher the yield the higher the rank), payout ratio (the lower the payout ratio the higher the rank), 3 year dividend growth rate, and 5/10 year Dividend Acceleration/Deceleration (5-year average increase divided by 10-year average increase).  Extra weight is given to yield and payout ratio rankings.

The top 10 stocks based on the new ranking system make the portfolio. Stocks will be sold at the re-balance date (generally around the 5th of the month) when they drop out of the top 15 (to limit turnover) and are replaced with the next highest rated stock.

This month there are three new positions. Walgreens (WAG) was sold for a gain of 26.44% (excluding dividends) and an original purchase date of 1/7/13. WAG’s yield no longer meets the threshold for inclusion in the highest yielding Dividend Champions. Its recent price appreciation has dropped its yield to 2.34%:

(chart courtesy of Finviz)

American States Water (AWR) was sold for a gain of 10.69% (excluding dividends) and a purchase date of 2/5/13.  Like WAG, it no longer meets the yield threshold for inclusion in the highest yielding Dividend Champions due to its recent price appreciation. The sale of AWR highlights one of the limitations of a ranking system that uses a “hard” cut-off based on yield. AWR’s yield was ranked 56th out of 105 Dividend Champions at the end of March, just out of the top 50% yielding stocks. Discretion could be used in situations like this when turnover is a concern, but my objective is to create a purely mechanical ranking system.

(Chart courtesy of Portfolio123)

Universal Health Realty Trust (UHT) is the third sale this month. It was sold for a gain of 35.57% (excluding dividends) and an original purchase date of 7/3/12.  UHT still maintains a high yield, but its high payout ratio and low relative dividend growth caused its overall ranking to drop.

Proceeds from the sales were used to purchase California Water Services (CWT), ExxonMobil (XOM), and Northwest Natural Gas (NWN).  XOM’s yield rank was 53rd out of 105; thus, we could see a similar situation next month with XOM as we did this month with AWR.  Any significant price appreciation could cause its yield to drop out of the top half. If turnover was a concern, AWR could be held and XOM not purchased this month.

The top 17 stocks based on my ranking methodology are below and displayed in order of their overall ranking (figures are March month-end):

The current portfolio is below:

All returns exclude commissions and taxes and are hypothetical. Real results will differ.

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